INSIGHT: US recovery will be slowed by developing EU recession

15 December 2011 15:59[Source: ICIS news]

By Joe Kamalick

WASHINGTON (ICIS)--Although the ?xml:namespace>US recovery has been moderate at best and slow in developing, economic growth has edged up – but the question now is whether the US ship can continue to make headway against storm winds of recession building anew in Europe.

In its annual year-end situation report and outlook for the year ahead, the American Chemistry Council (ACC) cautions that while things are improving in North America, the US recovery remains fragile and faces multiple risks, especially from a new European recession that is already underway and the potentially catastrophic eurozone debt crisis.

“Although the global economy is in its third year of recovery, the pace of improvement slowed,” the report said, citing higher energy prices, the earthquake and tsunami in Japan, the eurozone crisis and slowing growth in China.

“The global economy has reached a critical state,” said the report.

“A global soft-patch has emerged and has been centered in manufacturing,” the council’s economic team said, which is critical because “the manufacturing sector represents the primary customer base for chemistry”.

“Business investment and exports have been drivers boosting manufacturing output, but recent indicators suggest that the strong manufacturing recovery in the US has lost momentum,” the analysis related.

As evidence of that lost momentum, the US Department of Commerce (DOC) recently reported that new orders for US durable goods fell in October, the fourth decline in five months.

Kevin Swift, chief economist at the ACC, said that while the US fourth quarter gross domestic product (GDP) is likely to show a fairly strong gain of 2.5% to 3% on an annual basis, “that is probably not sustainable going forward, given headwinds all around the globe, particularly in Europe”.

Swift noted that the EU industrial production report, issued this week, already shows declining activity, “and what is expected will be a mild 2012 recession in Europe has already started”.

“That will cause some transmission to us,” he said, “and at a minimum is going to hit us in the form of fewer exports to the EU.”He noted that US chemicals exports to Europe for 2011 are already off from the year earlier.

And because chemicals often lead industrial sectors as trends develop, he said, other US exports to Europe are likely to see declines as well.

“Exports are going to slow for the US economy,” he said, “also because of China, which is experiencing some softness in its manufacturing and industrial sectors.”

The developing European recession also could impact the US recovery in an indirect but even broader fashion.

As the recession takes hold in Europe, Swift said, there could be a “flight to safety”, meaning that an increasing number of European investors will pull out of the euro market and euro-denominated investments and seek a somewhat safer harbour in the US and the dollar.

“And as the euro weakens and the dollar appreciates, that will hurt our exports worldwide,” Swift said.

He said he expects that US GDP will see 2% growth overall for 2012, with one or another quarters stronger or weaker than others.

“The likelihood is that the US will avoid another recession but that economic growth will not reach long-term trend levels until 2013,” the ACC year-end outlook report said.

In normal economic times, what economists call “trend growth” would mean annual US GDP expansion rates of 3% to 3.5%.

“While not the most likely scenario, the probability of another recession remains elevated,” the council’s economic advisors said, adding that “The European debt crisis continues to present one of the greatest risks to the world economy.”

Despite the clearly improving if modest US economic gains for the third quarter, the US Federal Reserve Board recently lowered its forecasts for the nation’s economy for this year and through 2014, citing the eurozone crisis.

In its rather sombre evaluation, the US central bank noted that the nation’s economy had “strengthened somewhat” in the third quarter. But the Fed also cautioned that key sectors remain weak and the EU debt crisis continues to pose a significant danger.

US GDP expanded at an annual rate of 2.5% in the third quarter ended 30 September, a solid improvement from the mediocre 1.3% growth rate seen in the second quarter and vastly better than the first quarter’s barely breathing 0.4% performance.

The Fed noted that “there are significant downside risks to the economic outlook, including strains in global financial markets”, the latter a reference to the continuing European financial crisis and the risk of Greece’s default on its sovereign debt, an action that could trigger collapse of the euro.